SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1996 Commission File Number 0-17810
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2742008
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
399 Boylston Street, 13th Fl.
Boston, Massachusetts 02116
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 578-1200
Former name, former address and former fiscal year if changed since last
report
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve (12) months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1996
PART I
FINANCIAL INFORMATION
BALANCE SHEET
(Unaudited)
March 31, 1996 December 31, 1995
-------------- -----------------
Assets
Real estate investments:
Property, net $13,254,804 $ 13,422,112
Joint ventures 3,732,969 4,085,073
----------- ------------
16,987,773 17,507,185
Cash and cash equivalents 1,849,383 1,934,364
Short-term investments 2,114,037 1,682,508
----------- ------------
$20,951,193 $ 21,124,057
============ ============
Liabilities and Partners' Capital
Accounts payable $ 28,077 $ 70,332
------------ ------------
Total liabilities 28,077 70,332
------------ ------------
Partners' capital (deficit):
Limited partners ($1,000 per unit;
100,000 units authorized, 32,848
units issued and outstanding) 21,004,332 21,133,635
General partners (81,216) (79,910)
------------ ------------
Total partners' capital 20,923,116 21,053,725
------------ ------------
$20,951,193 $ 21,124,057
============ ============
<FN>
(See accompanying notes to financial statements)
STATEMENT OF OPERATIONS (Unaudited)
Quarter ended March 31,
1996 1995
----- ----
Investment Activity
Property rentals $ 401,471 $ 376,033
Depreciation and amortization (201,370) (197,589)
Property operating expenses (55,561) (86,444)
------------- -------------
144,540 92,000
Joint venture earnings 54,091 51,101
Investment valuation allowance (350,000) -
------------- -------------
Total real estate operations (151,369) 143,101
Interest on cash equivalents
and short-term investments 47,636 28,224
------------- -------------
Total investment activity (103,733) 171,325
------------- -------------
Portfolio Expenses
General and administrative 26,876 32,577
------------- -------------
Net income (loss) $ (130,609) $ 138,748
============= =============
Net income (loss) per weighted
average limited partnership unit $ (3.94) $ 4.18
============= =============
Weighted average number of limited
partnership units outstanding
during the period 32,848 32,848
============= =============
<FN>
(See accompanying notes to financial statements)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Quarter ended March 31,
------------------------
1996 1995
---- ----
General Limited General Limited
Partners Partners Partners Partners
--------- -------- -------- --------
Balance at
beginning
of period $(79,910) $21,133,635 $ (93,010) $19,836,746
Net income (loss) (1,306) (129,303) 1,387 137,361
-------- --------- --------- ----------
Balance at end
of period $(81,216) $21,004,332 $ (91,623) $19,974,107
========= ========== ========== ==========
<FN>
(See accompanying notes to financial statements)
SUMMARIZED STATEMENT OF CASH FLOWS
(Unaudited)
Quarter ended March 31,
------------------------
1996 1995
---------- ---------
Net cash provided by operating activities $ 346,275 $ 304,558
---------- ----------
Cash flows from investing activities:
Increase in short-term investments, net (431,256) (318,190)
Investment in property - (82,108)
---------- ---------
Net cash used in investing activities (431,256) (400,298)
---------- ----------
Net decrease in cash and cash
equivalents (84,981) (95,740)
Cash and cash equivalents:
Beginning of period 1,934,364 1,560,873
---------- ----------
End of period $1,849,383 $1,465,133
========== ==========
<FN>
(See accompanying notes to financial statements)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the
Partnership's financial position as of March 31, 1996 and December 31, 1995
and the results of its operations, its cash flows and changes in partners'
capital (deficit) for the interim periods ended March 31, 1996 and 1995.
These adjustments are of a normal recurring nature.
See notes to financial statements included in the Partnership's 1995
Annual Report on Form 10-K for additional information relating to the
Partnership's financial statements.
NOTE 1 - ORGANIZATION AND BUSINESS
Copley Realty Income Partners 2; A Limited Partnership (the
"Partnership") is a Massachusetts limited partnership organized for the
purpose of investing primarily in newly-constructed and existing income-
producing real properties. The Partnership commenced operations in October
1987, and acquired the three real estate investments it currently owns
prior to the end of 1988. The Partnership intended to dispose of its
investments within nine years of their acquisition, and then liquidate;
however, the managing general partner expects to extend the investment
period at least into 1998, having determined it to be in the best interest
of the limited partners.
NOTE 2 - PROPERTY
The partnership's investment in property consists of an industrial
building in Rancho Dominguez, California, and a research and development
building in La Mirada, California. The following is a summary of the
Partnership's investment in property:
March 31, 1996 December 31, 1995
------------- -----------------
Land $7,339,344 $ 7,339,344
Buildings and improvements 12,235,440 12,235,440
Accumulated depreciation (3,145,237) (2,971,596)
Investment valuation allowance (4,200,000) (4,200,000)
------------ ------------
12,229,547 12,403,188
Other net assets 1,151,339 1,181,139
Accrued environmental
clean-up costs (126,082) (162,215)
------------ ------------
$13,254,804 $13,422,112
============ ============
As a result of a protracted vacancy period and reduced expectations
for rental rates over the Partnership's investment horizon, the managing
general partner determined during 1993 that the carrying value of the La
Mirada investment exceeded its estimated net realizable value.
Consequently, the carrying value has been reduced by a total of $4,200,000.
NOTE 3 - REAL ESTATE JOINT VENTURES
The following summaries of assets and liabilities and of results of
operations relate to the Medlock Oaks joint venture.
Assets and Liabilities
------------------------
March 31, 1996 December 31, 1995
-------------- -----------------
Assets
Real property, at cost less
accumulated depreciation of
$2,525,554 and $2,425,096 $ 8,005,977 $ 8,103,524
Other 403,375 270,575
------------ ------------
8,409,352 8,374,099
Liabilities 83,726 49,817
------------ ------------
Net assets $ 8,325,626 $ 8,324,282
============ ============
Results of Operations
---------------------
Quarter Ended March 31,
-----------------------
1996 1995
------ ------
Revenue
Rental income $ 320,174 $ 303,942
Other 588 1,318
------------- ------------
320,762 305,260
------------- ------------
Expenses
Depreciation and
amortization 111,867 107,542
Operating expenses 79,907 75,683
------------- -------------
191,774 183,225
------------- -------------
Net income $ 128,988 $ 120,035
============= =============
Liabilities and expenses exclude amounts owed and attributable to the
Partnership and its affiliate on behalf of their various financing
arrangements with the joint venture.
Management's Discussion and Analysis of Financial Condition and
- - ---------------------------------------------------------------
Results of Operations
- - ---------------------
Liquidity and Capital Resources
- - -------------------------------
The Partnership completed its offering of units of limited partnership
interest in April 1988, and a total of 32,997 units were sold. The
Partnership received proceeds of $29,379,522, net of selling commissions
and other offering costs, which have been invested in real estate, used to
pay related acquisition costs or retained as working capital reserves.
At March 31, 1996, the Partnership had $3,963,420 in cash, cash
equivalents and short-term investments, which will primarily be used for
working capital reserves. As a result of the poor performance of two of
the Partnership's investments over the past several years and the
uncertainty as to the timing of recovery, the managing general partner
determined that it has been, and continues to be, prudent to augment
working capital reserves. The Partnership did not make any cash
distributions to the partners during the three year period from the third
quarter of 1990 through the second quarter of 1993. Distributions of cash
from operations to the partners were resumed from the third quarter of 1993
through the first quarter of 1994, when the managing general partner again
suspended operating cash distributions as a result of the additional
uncertainty concerning the Partnership's future cash flow from the Rancho
Dominguez investment.
The Partnership maintains a fund for the purpose of repurchasing
limited partnership units. Two percent of cash flow, as defined, is
designated for this fund which had a balance of approximately $600 at March
31, 1996 and December 31, 1995. Through March 31, 1996, the Partnership
had repurchased 149 limited partnership units for an aggregate cost of
$135,921.
The carrying value of real estate investments in the financial
statements at March 31, 1996 is at depreciated cost, or if the investment's
carrying value is determined not to be recoverable through expected
undiscounted future cash flows, the carrying value is reduced to estimated
fair market value. The fair market value of such investments is further
reduced by the estimated cost of sale for properties held for sale, which
is the case for the Medlock Oaks property. Carrying value may be greater
or less than current appraised value. The aggregate appraised value of the
Partnership's investments was less than their aggregate carrying value by
$1,400,000 at March 31, 1996. The current appraised value of real estate
investments has been estimated by the managing general partner and is
generally based on a combination of traditional appraisal approaches
performed by the Partnership's advisor, Copley Real Estate Advisors, Inc.,
and independent appraisers. Because of the subjectivity inherent in the
valuation process, the current appraised value may differ significantly
from that which could be realized if the real estate were actually offered
for sale in the marketplace.
Results of Operations
- - ---------------------
Form of Real Estate Investments
The Dominguez and La Mirada investments are wholly-owned by the
Partnership. The Medlock Oaks investment is structured as a joint venture
with an affiliate of the Partnership.
Operating Factors
At Medlock Oaks, occupancy increased to 98% during the first quarter
of 1996. (Occupancy was 95% at December 31, 1995, and 93% at March 31,
1995.) Based on a contemplated sales transaction, the managing general
partner has refined its estimate of the fair market value of this
investment. Accordingly, the carrying value was reduced by $350,000
through a charge to operations in the first quarter of 1996.
The Rancho Dominguez property is 100% leased to a single tenant.
During the second quarter of 1994, the tenant notified the Partnership that
it was experiencing financial difficulty and desired to restructure its
lease. A lease amendment was executed during 1995, retroactive to January
1, 1995, which provided for a two-year extension of the lease and the
deferral of 1995 rental payments totaling $400,000. The deferred amount
would be payable based upon the tenant's achieving a specified level of
operating revenues. Since this threshold was not achieved, the deferral
was permanently abated. In December 1995, the tenant's former parent
company, which had guaranteed the lease, paid the Partnership $275,000 in
full satisfaction of its obligations under the guarantee, which was
recorded as rental revenue in 1995. The tenant paid rent based on the
reduced rate through March 31, 1996, but has not paid rent for April and
May as the Partnership is currently negotiating with the tenant to further
restructure or buy out their lease. Environmental remediation continues at
this property due to contamination by a former tenant. The remediation is
expected to be completed during 1996, the cost of which has been previously
accrued.
The La Mirada investment had been vacant from August 1990 through
January 1994, and has been fully occupied under a long term lease since
January 1, 1995. As a result of the protracted vacancy period and weakness
in the local market which had depressed rental rates, the managing general
partner determined in 1993 that the carrying value of the La Mirada
building exceeded its net realizable value. The carrying value was reduced
by $3,000,000 in 1993. Due to a further deterioration in market
conditions, the carrying value was further reduced by $1,200,000 in 1994.
Investment Results
Interest on cash equivalents and short-term investments increased by
approximately $19,000, or 69%, between the first three months of 1995 and
1996, as a result of an increase in the average investment balance,
partially offset by a decrease in interest rates. The growth in the
investment balance is consistent with the objective of increasing working
capital reserves.
Exclusive of the valuation allowance on the Medlock Oaks investment in
1996, total real estate operations for the first three months of 1996
increased by $55,530, or 39% as compared to the respective prior year
period. Rentals at La Mirada increased approximately $24,000 and property
operating expenses decreased by $30,000 due to a decline in maintenance
expenses and lower property taxes. Joint venture earnings from the Medlock
Oaks investment also increased between the respective periods.
Net income, prior to the valuation allowance, for the three months
ended March 31, 1996 increased by approximately $81,000 as compared to the
corresponding period of 1995, while cash provided by operations increased
by approximately $42,000. The difference is due primarily to the timing of
cash distributions from the Medlock Oaks joint venture.
Portfolio Expenses
General and administrative expenses primarily consist of real estate
appraisal, legal, accounting, printing and servicing agent fees. These
expenses decreased by approximately $6,000, or 18%, between the first three
months of 1995 and 1996, due to decreased legal and professional fees.
The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves as
determined by the managing general partner. Due to the suspension of cash
distributions, no management fee expense has been incurred since the first
quarter of 1994.
COPLEY REALTY INCOME PARTNERS 2;
A LIMITED PARTNERSHIP
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1996
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: None.
b. Reports on Form 8-K: No Current Reports on Form 8-K
were filed during the quarter ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COPLEY REALTY INCOME PARTNERS 2; A LIMITED
PARTNERSHIP
(Registrant)
May 14, 1996
/s/ Peter P. Twining
-------------------------------
Peter P. Twining
Managing Director and General Counsel
of Managing General Partner,
Second Income Corp.
May 14, 1996
/s/ Daniel C. Mackowiak
--------------------------------
Daniel C. Mackowiak
Principal Financial and Accounting
Officer of Managing General Partner,
Second Income Corp.